S&P says big four not out of woods yet

“While our most likely scenario for the Australian banking sector in 2013 is continued ratings stability, we note that there remains downside risk, and we cannot discount the possibility of negative rating momentum,” the S&P report says.
Photo: Louie Douvis

by
George Liondis

Australia’s big four banks have been put on notice that their credit ratings are in danger of being cut if global economic conditions deteriorate.

International ratings agency Standard & Poor’s said on Thursday that the outlook for the AA- rating of Australia’s major banks was “stable".

But in a new report on Australia’s banks, S&P said there was more chance of ratings downgrades than upgrades this year and told the banks to “watch this space".

“While our most likely scenario for the Australian banking sector in 2013 is continued ratings stability, we note that there remains downside risk, and we cannot discount the possibility of negative rating momentum," the S&P report says. “We believe that the performance of the four Australian major banks – already highly rated and in overall good shape by international standards – will be sound during 2013, and likely will stay consistent with current ratings."

S&P cut the ratings of the
ANZ Banking Group
,
Commonwealth Bank of Australia
,
National Australia Bank
and
Westpac Banking Corporation
by one notch from AA to AA- in December 2011 in a move that was roundly criticised by the banks.

However, they remain some of the highest rated financial institutions in the world after major banks in Europe and the United States faced deeper cuts to ratings in recent years as their economies stumbled.

A higher credit rating allows banks to raise money more cheaply from investors.

In the report, S&P acknowledged that Australia’s banks were in a stronger position than most global counterparts but warned they would not be immune if there were a downward spiral in the world economy.

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“We believe that the prospect for rating upgrades in 2013 is low, and that there is a greater possibility of rating downgrades," S&P said. “That said, our current view is that negative ratings transitions are less than a one-in-three possibility for the Australian major banks."

While the global economic backdrop has stabilised in recent months, S&P warned that a hard landing in China would pose a major threat to Australia, which could have negative repercussions for the ratings of banks here. The ratings agency added that local bank ratings would be in danger if Australia lost its coveted AAA country credit rating. Renewed turmoil on global markets that triggers an increase in the cost of borrowing for Australia’s banks would be another factor that could lead to ratings downgrades.

“While it is challenging to forecast explicit negative economic and industry risk scenarios that could cause downgrades, we would anticipate that the emergence of a China hard-landing economic scenario would likely take its toll on the Australian economy, through a combination of increasing unemployment, softer residential property prices, and an overall economic slowdown, which in turn would likely hurt bank credit quality," S&P said.

While the focus is on the big four banks, S&P said Australia’s smaller regional banks were more vulnerable in the event of a downturn. “We believe that the financial profiles and issuer credit ratings of the regional banks and small financial institutions could be most at risk from a major economic downturn," S&P said.